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TheStreet Open House

3 Reasons the Gold Bubble Will Burst

NEW YORK ( TheStreet) -- There are three recent developments with the potential to burst the gold bubble:

Development #1: Instead of European debt woes escalating, they have retreated. Investors are now confident that the Ireland situation will be stabilized . Euro stability is not good if you're looking for a continued gold surge. In addition to the expected Ireland bailout, the eurozone is showing tremendous discipline in sticking to its rigorous plan of austerity even as its citizens revolt. An environment of cost-cutting and fiscal restraint is not conducive to a gold rally.


Development #2: China is raising its reserve requirement ratio for banks by 0.5% in an effort to combat inflationary pressures. This is the third tightening enacted by China since September. This policy is viewed as a moderate measure to control inflation without killing growth. These actions are enough to qualify as a negative for gold when considering the asset as a speculative play on inflation.

Development #3: Ben Bernanke set the record straight in his speech to a conference at the European Central Bank in Frankfurt when he lashed back at critics of QE2 by making it clear the United States is nowhere near an inflationary environment. In fact, the contrary risk of deflation still outweighs it. He mentioned that sluggish U.S. growth, falling inflation and an unemployment rate that has hovered near 10% for months convinced Fed policymakers they needed to add more stimulus to the economy. "On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," he said in his speech. "As a society, we should find that unacceptable."

As I mentioned in this week's CNBC interview, the gold rise that began at the end of 2007 was driven by hedge funds that utilized gold as an investment vehicle of fear. Since that time we've feared a systematic collapse of the banking system, we've feared a Great Depression, we've feared currency chaos caused by a potential collapse of the euro zone, and we've feared a double dip recession in the U.S. Each of these reasons provided gold with a legitimate reason to climb. However, because of the decisive actions taken by global leaders none of these worst case fears have materialized.

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